Credit forecast: Hospitals will recover only slowly from lingering ‘labor-demic’

Fitch Ratings expects many not-for-profit hospitals to suffer wilting credit scores in 2024. The New York- and London-based credit specialists cite as likely causes persistent staff shortages, upward wage pressures and protracted overall inflation.

Fitch suggests these three overlapping factors are forcing a significant portion of NFP hospitals to withstand a nasty “labor-demic.”

In its annual outlook report released this week, the agency says the coming calendar year will probably strike much of the sector as “another make or break” period.

“Much of a hospital’s ability to be successful will depend on its ability to recruit and retain staff in the currently hyper-competitive landscape for personnel,” Fitch senior director Kevin Holloran says in a news release announcing the report.

A frustrating aspect of the pessimistic outlook is that the labor-demic is sticking around despite the improvement of other “core credit drivers” such as patient volumes and overall liquidity, Fitch points out.

Fitch expects most hospitals’ credit quality will neither soar nor dive but, on average, fall into the middle of the pack.

Hospitals at the lower end of the middle will realize lower margins, albeit “not [low] enough to warrant widespread downgrades.” They will also rely heavily on contract workers to close labor gaps left by unfilled staff openings.

Those at the extreme upper end, what few there are, will succeed in recruiting and retaining staff while seeing stable patient volumes, Fitch says.

Worst off will be hospitals that struggle to recruit and retain staff while facing falloffs in demand for services. “This last group of hospitals will be most vulnerable to rating downgrades in the coming year,” Fitch warns.

To this Holloran adds that another concern heading into 2024 will be breaches of bond covenants.

“Second year violations, which would occur in calendar 2024 as fiscal 2023 audits are finalized, may intensify the potential for bondholders to declare an event of default and accelerate payment of bonds,” Holloran says.

In a brief report summary with a link to the full report, Fitch Ratings offers a concise snapshot of the current status quo:

“As the largest single expense for healthcare providers, managing salary, wages and benefits has emerged as the single most meaningful differentiator between operational success and failure. Organizations that have successfully attracted and retained staff at all levels, not simply nursing, have experienced reductions in both usage and cost per hour of external contract labor, as well as more new hires compared to ‘leavers.’ These are all positive signs and contribute to cost savings and, perhaps more importantly, to quality and patient safety.”

The company says it expects the labor supply shortage to hang around for the foreseeable future before slowing starting to resolve, “with the expectation for added incremental operational recovery in 2024.”

Fitch also expects a number of hospitals and other provider orgs will struggle to see any labor-market recovery at all.